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Reliance Jio: Creating a

capacity-led telecom giant

After patiently putting in place an exhaustive digital
infrastructure, Jio expects to earn data revenues of Rs1.50 lakh
crore by 2020-21; and offer digital services that touch citizens'
lives in multiple ways

Just when it begins to appear like the market has been able to put a finger
on the pulse of the full potential that Reliance Jio Infocomm (Jio) holds,
new information comes to light, which magnifies the probable scope of the
oil-to-yarn and retail conglomerate’s new telecom venture.

Sample this: On March 2, at the first analysts’ meet organized by Jio, an

arm of Reliance Industries Ltd (RIL) led by India’s richest billionaire
Mukesh Ambani, the company’s management indicated that by 2020-21 the
company could potentially clock revenues to the tune of Rs1.50 lakh crore.
To put things in perspective, the telco’s targeted turnover is over 50 percent
of the consolidated turnover of Rs2.84 lakh crore that RIL reported in
2015-16, through its operations across verticals including oil and gas
production, crude refining and marketing, petrochemicals, and retail.

The math is simple. Jio expects the share of voice revenue in the Indian
telecom market to rapidly and progressively make way for earnings from
data services. According to a Jio investor presentation, the data market in
India is expected to be worth Rs3 lakh crore by fiscal 2021. With the
technological backend and infrastructure that it has put in place over the
last seven years, Jio expects to be in a position to capture at least half of this
market, equal to Rs1.50 lakh crore.

Not only that. Jio’s management further stated that it expects to earn an
Ebitda (earnings before interest, tax, depreciation and amortization)
margin of 50 percent, implying an absolute Ebitda of Rs75,000 crore.
A detailed analysis of Jio’s gameplan reveals that, contrary to the belief that
some hold that volume growth on Jio’s network will only be driven by
subscribers who came on board for the free services that it is offering till
March 31 and low-value subscribers, the telco expects revenues and
profitability to be driven by high value customers.

“Jio’s strategy remains centered on unleashing its capacity advantage and

building consumer habits for high data consumption,” observes a CLSA
report dated February 28.

On February 21, RIL chairman Mukesh Ambani announced that Jio will
start charging for its services from April 1. While many initially thought that
paid Jio services (which are being offered free under promotional schemes
from September 2016 till the end of the current month) will lead to the
creation of a more level playing field in the competition-ridden telecom
sector, the aggression with which the pricing strategy was announced led to
the view that not much may change with respect to the businesses erosion
that incumbent telcos have suffered since Jio’s launch.

For instance, for its first 100 million subscribers, Jio has launched a special
membership plan known as Jio Prime. Any existing Jio subscriber (and
those that take up a connection till March 31) will be eligible to enroll for
Jio Prime by paying an annual fee of Rs99. These subscribers can then pay
Rs303 per month to enjoy free voice calls and free 4G data (with a daily fair
usage cap of 1GB) for another 12 months ending March 31, 2018.
Additionally, Jio will also offer its full bouquet of media services, worth
Rs10,000, to its subscribers free of charge till March 2018.

That’s not all. By speaking to retailers and various channel partners,

brokerages have also discovered that Jio has other tariff plans on offer, each
promising to deliver maximum bang for the buck. For instance, there are
monthly plans of Rs149 (for 2GB data) and Rs499 (for 56 GB data with a
daily 4G speed cap of 2 GB). There are also four long-validity plans that
have no daily limit. These include a Rs999 plan (60-days validity for 60
GB); Rs1,999 (90 days, 125 GB); Rs4,999 (180 days, 350 GB); and Rs9,999
(360 days, 750 GB). All of these plans, except the Rs149 plan, entail a tariff,
which is higher than the average revenue per user (ARPU) recorded by the
telecom sector. This clearly indicates that Jio’s business model isn’t solely
dependent on undercutting the market to gain market share.

“We find it positive that Jio has chosen not to start the actual revenue
paying scheme from April at steeply discounted tariffs, but at around Rs311
per month (Rs303 plus the equated monthly portion of the Rs99 annual fee
for Jio Prime), which is higher than the average industry ARPUs,” says a
March 1 report by JP Morgan. “The flip side is how many of the current 100
million SIMs migrate into paying subscribers where even the discounted
ARPU of Rs311 would imply 50 percent premium to current industry
average ARPUs. What it does highlight is that Jio is focusing on high paying
subscribers and not on the entire telecom subscriber base.”

Yet, it is becoming increasingly clear that with tariff plans that are higher
than the industry average, yet offer maximum value by way of increased
data availability, Jio will continue taking a toll on the financials of rival
telecom firms.

“Assuming this plan (Rs303) appeals to only customers with total across-
SIMs wireless spend of Rs200 per month or more, (it) suggests a potential
ceteris paribus negative impact of around 16-17 percent on industry
revenues in FY2018,” says a February 28 report by Kotak Institutional
Equities. “We do not think incumbents can (or should) look at this as
another promotional offering they can choose not to respond to.”

After announcing its entry into the telecom sector in June 2010 through the
acquisition of Infotel Broadband Services, which won pan-India 4G
broadband wireless spectrum through a government auction, it took Jio
over six years to put its infrastructure, including an extensive countrywide
network of optic fiber cables, in place before announcing the
commencement of commercial operations. While the delay in rollout over
the last few years led many analysts to seek visibility on the conglomerate’s
telecom plans, the rationale behind taking time to patiently build its entire
network before launching services, is now coming to the fore.

“Jio’s strategy is to build huge capacity. According to the Telecom and

Regulatory Authority of India, overall data consumption in the industry
stood at 155 million GB in the first quarter of 2016-17. Jio management
indicated that currently about 1billion GB per month data is getting
consumed on Jio and that it will have the capacity to offer about 4 billion
GB data per month by end-FY17,” says a March 2 report by Motilal Oswal.
“According to the management, it should be able to cater to 60 percent of
estimated data demand in FY21 of 6 billion GB per month.”

The Jio management impressed upon analysts that the high number of cell
sites and spectrum that it possesses, along with its relatively deeper fiber
backhaul of 60 percent cell sites (versus a ratio of 20 percent for incumbent
operators) and a better signal-to-interference-plus-noise ratio gave it a
competitive edge over incumbent as the latter go about deepening the reach
of their respective 4G services to compete with Jio. In its investor
presentation, Jio also stated that re-farming 3G airwaves for 4G use, which
incumbent telcos may seek to do, would be costly and challenging due to
the upgrades needed to network equipment such as base transceiver
stations and antennas. This, according to the company, will give it a
capacity lead over rivals for a long time.

Ambani isn’t going to rest easy by simply creating one of the world’s largest
telecom networks. Though an integral one, that is only one part of the
gameplan. The second and equally critical component of Jio’s strategy is to
sweat the assets it has created to offer a whole host of digital services to its
subscribers. Some of these services were on display during the analyst
meet. Apart from the content and financial services that Ambani has
already extensively talked about, Jio is also working on digital platforms
such as connected cars, home automation, Internet of Things and
surveillance systems.

Jio’s aggressive entry into the market with its paid services, backed by a
robust and future-ready backend infrastructure, may be a short-term
negative for the telecom sector due to the challenges faced by other telcos.
But the entry of the new challenger will also lead to long-term benefits by
way of expansion of the overall telecom market (especially for data
services), which other industry players can benefit from.

Post the launch of Jio, the market for data consumption in India has
exploded. From an average consumption of 200 million GB per month
before Jio’s launch, the Indian market is now using data to the tune of 1
billion GB per month with Jio in the picture. At the current level of
consumption, India has become the world’s leading mobile data market,
surpassing global leaders in this space including US and China.

Furthermore, of the Rs3 lakh crore-mobile data market that Jio foresees in
India by 2020-21, the telco is targeting a 50 percent market share, implying
potential for other industry players to exist. Although, the number of
players left in the market to compete with Jio may be fewer with a wave of
consolidation sweeping through the sector, which has seen the likes of
Bharti Airtel and Telenor combining assets and operations; along with a
potential merger between Vodafone and Idea; and a three-way
amalgamation between the Anil Ambani-led Reliance Communications,
Aircel and Sistema Shyam.

(Reliance Industries is the owner of Network 18, publisher of Forbes